JPMorgan, Justice Dept. reach $13B settlement

Nov. 20, 2013
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A pair of traders working in the JPMorgan booth on the floor of the New York Stock Exchange on Nov. 19, 2013, as the Department of Justice prepared to announce a settlement with the bank. / Richard Drew - AP

by Kevin McCoy, USA TODAY

by Kevin McCoy, USA TODAY

Banking giant JPMorgan Chase Tuesday finalized a record $13 billion settlement of multiple investigations over toxic mortgage investments such as those that helped spark the 2008 financial crisis.

The agreement announced by the U.S. Department of Justice and state officials in New York includes a statement of facts in which the nation's largest bank admitted that it knew that residential mortgage-backed securities that it marketed did not comply with underwriting guidelines and weren't fit for sale.

The settlement covers civil mortgage-related claims but does not absolve the bank or its officials from potential criminal charges, though JPMorgan said it broke no laws.

The penalties total more than half the $21.3 billion the bank reported in 2012 profit - and mark the largest government settlement ever paid by a single U.S. firm. The agreement also ends civil, mortgage-related probes that dealt a financial black eye to the leading bank survivor of the financial crisis, and to its CEO, Jamie Dimon.

Under the deal, JPMorgan agreed to pay $9 billion to settle federal and state civil claims by various entities related to the mortgage securities. That includes a $2 billion non-tax-deductible fine to the Department of Justice. JPMorgan said it would seek tax deductions for the remaining fines.

The bank will also pay $4 billion in the form of relief to aid consumers harmed by improper mortgage actions of JPMorgan and two subsidiaries it acquired during the crisis - investment bank Bear Stearns and failed bank Washington Mutual. That relief will come via principal forgiveness, loan modification and efforts to reduce blight.

An independent monitor will oversee JPMorgan's compliance.

JPMorgan shares closed up 41 cents at $56.15 in Tuesday trading.

"Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown," said Attorney General Eric Holder. "JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm's behavior."

JPMorgan, which in October disclosed it had set aside $23 billion for litigation costs, said it had fully reserved for the settlement. The bank pledged complete delivery of promised mortgage forgiveness and other relief to injured borrowers before the end of 2017.

"We are pleased to have concluded this extensive agreement ... and to have resolved the civil claims of the Department of Justice and others," said Dimon in announcing the settlement.

Asked during a later conference call with Wall Street analysts why investigators targeted the New York-based bank, which emerged largely unscathed from the financial crisis over other lending institutions, Dimon said: "They picked us first. There had to be a first."

He and JPMorgan Chief Financial Officer Marianne Lake told analysts much of the improper mortgage conduct occurred at Bear Stearns and Washington Mutual. "We did not admit to a violation of law," Dimon also stressed.

Nonetheless, New York Attorney General Eric Schneiderman, California Attorney General Kamala Harris, Sacramento U.S. Attorney Benjamin Wagner and other officials involved in investigating JPMorgan's mortgage actions called the settlement a significant government victory.

John Coffee, a securities regulation expert at Columbia Law School in New York, said the financial penalties appeared to signal "a new toughness" at the Department of Justice since a 2012 case involving HSBC. Prosecutors drew criticism for not seeking a criminal indictment of the London-based global bank in charges that it ignored possible money-laundering. Instead, HSBC paid $1.9 billion under a deferred prosecution deal that was later approved by a judge.

The global deal differed from previous government settlements that "tended to focus on a single transaction or portfolio while failing to address the larger picture," said Thomas Gorman, a former enforcement attorney for the Securities and Exchange Commission.

The deal follows billions of dollars in other settlements reached by JPMorgan in recent months. They include a tentative $4.5 billion settlement announced Friday with 21 major institutional investors over mortgage-backed securities sold to them before the crisis. Also included is more than $1 billion to resolve the bank's "London whale" trading debacle. The bank initially asserted those trades, which racked up $6.2 billion in losses, had been a hedge against risk. But the strategy instead became proprietary trading for JPMorgan's benefit that was partly funded with federally insured deposits.

Along with the criminal investigation, the bank said its remaining mortgage-related risks include cases with insurance firms, class-action and direct-purchaser lawsuits and claims involving disputed insurance on Federal Housing Administration loans.